Saturday, March 15, 2008

ECON 260: Comment Thread for 3/7

Discuss the fundamental question in Chapter 11 -- is more really better? That is, does more income/consumption lead to higher welfare (and thus should we place a high value on maintaining economic growth)?

In addition to the chapter, here are several additional sources to consider:

A nice overview of the economics of happiness -- including a good description of the Easterlin Paradox

British economist Andrew Oswlad has written alot recently arguing that economic growth doesn't increase happiness. Here's one of his popular articles.

Here are several nice links.

Daniel Kahneman describes his research on the topic and why he's changed his mind.

Will Wilkerson's whole blog largely centers around these topics.

Some extended thoughts from economist Tyler Cowen.

Robert Frank argues that we shouldn't confuse happiness and welfare.

Ok ... I am tempted to post a lot more, but that's probably enough.

From an evolutionary perspective, the Easterlin Paradox and the idea of a hedonic treadmill are perfectly sensible; individuals with relative, dynamic, rebounding happiness meters should enjoy a competitive advantage when compared to those measuring their welfare in absolutes (even if those absolutes are constructed from a baseline depending on their circumstances).
Picture two individuals, A and B, each of whom has just been promoted at his respective company.

A has an absolute happiness meter. He receives a sense of satisfaction from the promotion and the increased income, and thus has less motivation to work harder for another (if we assume utility has a positive relationship to income, and a negative one to effort). He may advance further in the company, or he may stay where he is, but there is some tangible point at which he will be "satisfied"- it will no longer be worth his effort to try to increase his income.

B, on the other hand, has a relative happiness meter. He also receives satisfaction from his promotion, because compared to his former peers, he's doing a lot better. Within a short period of time, though, he recalibrates his happiness meter to the people around him, and realizes that he's not doing so well compared to his new coworkers and more affluent friends. He maintains or increases his effort.

We can argue about whether it's better to be A or B- while A will stop trying at some point, he isn't plagued by the constant dissatisfaction of his more ambitious counterpart. On the other hand, when A's welfare increase stagnates, it affects his whole household, and has implications for the health care, education, and networking opportunities of his children. While these may or may not factor in to his reported happiness, healthier, more educated kids are less likely to die early, drop out of school and end up in dangerous lifestyles.

B may not ever be "satisfied" with his life, but he will work to increase his welfare, and thus that of his dependents, for as long as he can. His children stand higher chances of being successful later in life; which is better both from a GDP-centric perspective and an "absolute happiness" perspective.

A woman looking for a mate, faced with two men identical in all but their happiness meters, is going to go with the one who measures his satisfaction in relative terms- he's the ambitious one, the one who stands a better chance of ensuring healthy, cared-for offspring. Without mates, the absolute-happiness-meter guys should basically die off.

If ambition is an evolutionarily stable strategy, we can expect all the people polled in these happiness surveys to answer from a perspective of a relative happiness meter, which is completely unrelated to welfare. If we can't trust happiness responses to give us accurate data about how well people are really doing, we have to make up a measure, and income, which correlates pretty darn highly with health, education, and tolerance, and pretty inversely with violence, drug/alcohol addiction, and dangerous behavior, is a pretty good one.
Daniel Kahneman tried to create an alternative "treadmill" (aspirational rather than hedonic) and failed. Although, when he described his studies methods it sounds like he hadn't found a proper way to evaluate how someone might be naturally happier in one place than another. That is, if one person has high standards of happiness but undergoes the same degree of fluctuations of happy and sad moments as a person with lower standards- are they better off? He says no.

All I can come to conclude after reading these economic discussions of happiness is that economists have not yet found a proper way to evaluate what they wish to evaluate. I am not doubting that there is a way they can do it with come accuracy, but I'm quite certain it has not been found.

Daniel Frank surprised me when he ended his discussion about the correlation between happiness, welfare and economic growth by saying quite simply that he liked growth because it created technologies which extend our life expectancy.
I have lots of ideas on why he might have chosen to end his argument so weakly, but still do not really understand how these types of studies are carried out - what are the methods??

Instead I'll pose the question I have turning in my mind: Why do you think that economists need to find a way to quantify happiness and if they found some key reliable indicators, would we all try to obtain these things and then expect happiness to come naturally?

Is it even reasonable or good that we attempt to quantify happiness?
In my opinion, it seems like increasing income will increase happiness only up to a certain point. After you've reached that point, earning more money does not result in more happiness.

I feel like that specific "point" where happiness is not longer affected by income is when an individual is able to fulfill all their basic living needs (food, water, shelter, etc.). After reaching that point, earning more income is nice (since it allows us to consume more stuff), but it does not have the same effects of happiness (because I no longer am worried about having my basic needs met).

I think Megan has a point in asking why we need to quantify happiness. It seems like happiness is something that cannot be accurately measured, yet economists strive to find a way to do so. I also do not think that happiness can be measured in a linear way. I think happiness occurs much more sporadically than the current research suggests, which would make it even more difficult to measure.
I think that questions of happiness are interesting, however, I do think that welfare measures might be more useful. We can ask people for their very very subjective happiness level and it seems from these articles that, on average, people are pretty happy. What do we make of the fact though, that people always seem to think they could be happier? We know that lottery winners report about the same level of happiness after winning the lottery as they did before, but that doesn't stop millions from buying a lottery ticket. How happy are you if you think you could be happier? Does studying happiness have any point if it seems that people can just adapt to a fairly happy level regardless of circumstances?

What do we make of the fact that the wealthy in Latin America apparently derive some happiness from the existence of people worse off than themselves? That seems to say so rather unattractive things about humanity.

I thought that, in limited circumstances, the idea that low expectations help perpetuate poverty was rather interesting. It does seem to be true in some cases: it's hard to work towards a life or belongings you have never encountered. However, what effects will greater access to information and international communication have on this? It was easy enough to be happy with your hut until you started seeing pictures of palatial estates. Will this lead to falling happiness around the world? What could be done to halt that and would the costs of action outweigh the benefits of letting them become drastically unhappy?
I think to the question posed "Does more income/consumption lead to higher welfare?", Kahneman answered it best when he said, "Conditions that make people satisfied with their life do not necessarily make them happy." Essentially stating that the happiness of ones life (or increased income or consumption) is not all that determines the welfare of their life.

Now taking a step back and looking at the bigger picture whether more really is better. I find the arguments presented in chapter 11 about bandwagon, snob and Veblen effects very convincing. Particularly the argument that people consume what they do because they hope to attain membership and recognition in a community.

I believe welfare and income/consumption are not directly correlated and that some other method of measuring welfare should be used.
I am still unconvinced that happiness is even the right measure of well-being. In terms of rights, we don't have a right to happiness as much as we have right to the pursuit of happiness. This is generally construed as the right to protection from harm (from others, businesses, the government). It seems to me that harm is much easier to measure than happiness. In many cases, science will provide a much more useful metric than a CV study. We can measure the negative effects of pollution and toxins, but as the treadmill study pointed out, happiness is largely relative. Anyways, I think we need to rethink this whole "utility" thing.
We all seem to agree that the marginal utility curve of income has a decreasing (yet arguably still positive) slope as wealth increases. It seems that this generally accepted correlation is one reason why it is so tempting to try to quantify happiness. It seems intuitively true, so lets see if it holds empirically.
I believe that for some people more is better. Sometimes increased consumption/income makes people happier, but I do not believe that this argument is true of all people. To a certain point or at least until your basic needs are met, increased income would make all people in this dire situation happier. Starve, don't starve-I feel like it would be nearly impossible for some one to argue that the first option would create more happiness. Nevertheless, at a certain income level, whether or not more is better seems like it would depend upon the individual. For some people increased income matters a lot, others derive happiness from different arenas.

In addition, I believe that there can often be too much of something, even of a good thing. For some people, two choice can be preferable to say 102 choices.
I think others have suggested, and i agree, that its not our place as economists to deal with happiness. People don't know what makes them happy, but if economists knew better, is it their place to give them things that will make them happy? That's neither democratic nor free-will, doesn't sound like a popular economic system.
I agree with Kelly, people have a right to happiness, and if they think that's from whatever they define as "welfare", then economists should give them the best "welfare" they can.
Fundamentally, I disagree with the economic philosophy that greater income and consumption leads to higher welfare or happiness. Happiness is in the control of the individual and is based on attitude and surrounding oneself with non-material things and people that bring them joy. Comparing money to happiness is a very western thought process. It is basically saying that material objects will make people happy, which I think many people know (but may not realize) does not guarantee happiness. If anything, I think it would lead to less happiness because money and materials do not last and often loss their initial thrill. On the other hand, I agree that earning an income sufficient to meet basic needs of life will lead to higher welfare. Beyond needs being met, happiness has very little correlation to the amount of money a person obtains.
"Economists’ faith in the value of growth is diminishing. That is a good thing... Happiness, not economic growth, ought to be the next and more sensible target for the next and more sensible generation." -Andrew Oswald

I think this idea, in the future there is a possibility that we may be able to understand happiness enough to promote it in ways like we do economic growth, is very interesting. This quote suggests that we can move beyond the seemingly “unmeasurableness” of happiness in the future and start making it an economic priority. If we were able to focus on maximizing happiness instead of economic growth, many of our problems would be solved. For example, many people would be happy to not be dependent on oil and to reduce our carbon footprint. If we focus on making these people happy, something would be done to achieve these goals rather than focusing on economic growth. Also, if we focused on making everybody happy…. everybody would be happy! One could argue that if everyone was happy, happiness wouldn’t be exciting anymore; however, if everyone was truly happy, happiness would no longer be measured in relative terms.

Although I definitely don’t see this scenario anywhere in the near future, it is kind of fun to imagine a world fueled by happiness.
Instead of quantity, look for quality. In that light, more is not necessarily better, it is the kind of stuff you have that matters. Jared Diamond spends his book, "Guns, germs, and steel" basically arguing that the affluence of countries today were shaped to a great extent by the materials made available by the local climate 13,000 years ago up till now.
I agree with the idea that quantifying happiness is problematic, and I think we may need to accept the fact that economics may not be the best way to deal with our questions about happiness. All sciences have their limitations, and frankly, everything we've learned about measuring happiness with economics has shown me that economics is a bad tool for measuring science. There are so many problems with using CV studies to measure how much something is worth to someone, and happiness is such a relative term that can't be compared between different people, that using economics to measure happiness is like using a colander to boil water.

My answer to this question of more being better is that there are no absolutes, and thus, more isn't always better, or there may be a point at which more is no longer any better (diminishing marginal returns).
I think putting a value on happiness is very problematic (and even more difficult in our society). We live in a melting pot of lots of different cultures. People from different cultures have dissimilar value systems and therefore, different things will make them happy. I do think an increased level of income (and consumption) can have an immediate affect of increasing happiness, but once that point of consumption becomes the normative standard of living the slope of increased happiness will level of off. I think this correlation of increased happiness and increased income/consumption is especially true for people who have higher difficulty and stress affording the actual necessities we need to live (i.e. food, shelter, clothing). Beyond that, I in no way believe that material possessions make people happy. However, I do feel a person wanting to be able to buy certain things or have a higher salary makes them strive to work for those things.
More is better, but only to a point. After your basic needs are met an increase in income does not do very much to increase one's welfare.
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